What We're Reading ~ 11/7/2012

Hedge funds are the rock stars of the investment world... for now [Abnormal Returns]

Hedge fund analysis: in-depth guide to evaluation return potential & risks [Frank Travers]

Stocks for an Obama victory [StreetInsider]

On predicting a recession and reducing portfolio risk [Reformed Broker]

Bridgewater's macro play: long gold oil & euro [Hedge Fund Intelligence]

On the irrational behavior of investors [Psy-Fi]

David Einhorn's comments on GLRE conference call [Santangel's Review]

Investors seemingly always under-diversify [Jason Zweig]

Most important question for investors: when do you need the cash? [Aleph Blog]

Howard Marks established Oaktree as leader in distressed [P&I]

Hedge fund industry returning to its tiny roots [Barrons]

Do fund managers manipulate prices? [Turnkey Analyst]

Julian Robertson seeds Tiger Pacific Capital [Reuters]

Greenlight Re shows benefit of hedge fund reinsurer strategy [Artemis]

Empirical characteristics of mega hedge fund firms [SSRN]

Trader's journal: 7 attributes to give you the edge [Stockcharts]

Profile on Anheuser Busch InBev [BusinessWeek]

Children's Investment Fund on Porsche & Japan Tobacco: Q3 Letter Excerpt

Christopher Cooper-Hohn's Children's Investment Fund was up 1.6% for the third quarter and up 18.26% year to date as of the end of Q3.  TCI runs a concentrated portfolio and their Q3 letter to investors provides updates on their positions in Porsche SE as well as Japan Tobacco, which we've excerpted below:

Porsche SE

Back in July, Volkswagen (VW) announced they would purchase the other 50% of Porsche that they didn't own yet for 4.5 billion euros.  The deal's closure makes Porsche essentially a holding company that has 2.5 billion euros in cash and 50% of the common stock of VW.

As to their thesis, TCI writes:

"Porsche currently trades at a large discount to NAV due to uncertainty regarding the outcome of several legal cases that have been brought against the company in Germany and the US, regarding alleged market manipulation in its failed attempt to take over VW in 2008. Porsche holds the view that these allegations are unfounded and without merit, and during the quarter it won a significant victory when a German court dismissed two of the cases. While the amount of damages being sought in these cases was small, at under €5 million, we think they should provide a precedent for the much larger claims of €4 billion that are still pending at the same court. Our view is that the amount Porsche will eventually pay to settle these cases will be much less than the market is currently pricing in. And once the litigation is settled, there is a good chance that VW and Porsche will merge and the discount to NAV will close completely."

Children's essentially believes they can make money in four ways:

1. "Strong underlying performance from the investment in VW"
2. "A successful and benign resolution to the legal cases"
3. "Large and increasing dividends from VW flowing to Porsche shareholders"
4. "Long-term potential for a merger between Porsche & VW"


Japan Tobacco

Children's points to Japan Tobacco's strong recent earnings and notes that VAT in Japan is rising which should allow for price increases. 

The company is also changing the name of its largest selling brand from 'Mild Seven' to 'Mevius'.  While such a move might seem odd at first glance, the company is doing so because this will allow them to sell the product in other countries where the use of the word 'mild' in product names is essentially prohibited. 

Here's why TCI sees Japan Tobacco as compelling:

"Dividend guidance is ¥12,000 per share which implies a payout ratio of approximately 36%. JT is expected to return an estimated ¥370bn to shareholders this year of which ¥250bn is through a share buyback exceeding their estimated profits. This should be a strong catalyst for the stock to re-rate in line with its global peers. Valuations are very attractive post the recent sell-off, JT trades on 10.5x P/E for the year ending March 2014 at a 30% discount to the average of BAT and PMI. We expect the stock to re-rate post the share placement by the Japanese government toward parity with BAT and PMI."


Children's Top 10 Positions (as of Q3 end)

1. Lloyds Bank Bonds: 20.1% of NAV
2. News Corp: 18.8%
3. Japan Tobacco: 16.8%
4. Porsche SE: 15.5%
5. QR National: 13.3%
6. CESP: 12.8%
7. Red Electrica: 10.9%
8. Coal India: 9.4%
9. Safran: 8.7%
10. Enagas: 8.0%


For more on this fund, we've previously posted Children's thesis on News Corp, Union Pacific & Walt Disney.

Hedge Fund Short Positions in Germany: Maverick, Tiger Global, Passport & More

Just yesterday, we posted up a ton of hedge fund short positions in the UK due to new regulations.  Continuing our coverage of EU markets, today we highlight hedge fund short positions in German markets.

More Short Selling Disclosures in EU Countries

What's interesting here is that with the new regulations in EU countries, there are theoretically going to be more filings on shorts than longs.  Public disclosure thresholds now start at -0.5% for shorts while public long disclosure is only required when an investor takes a stake greater than 3% of the company.

Some may argue that this might not be the case due to the fact that more investors go long than short, and typically long positions are sized much larger than short positions due to risk management.  We'll have to wait and see, but so far there's been an onslaught of short filings.


Hedge Fund Short Positions in Germany Revealed

Below is a breakdown of the short positions hedge funds have disclosed as of November 1st/2nd.  The percentage represents how much of the company's stock the fund is short:


Maverick Capital: Short -7.82% Aixtron SE, -0.47% Axel Springer Aktiengesellschaft

Passport Capital: Short -0.61% Nordex SE

Pennant Capital: Short -2.27% Aixtron SE, -0.68% Heidelberger Druckmaschinen Aktiengesellschaft, -0.95% Sky Deutschland, -0.90% TUI AG

Tiger Global: Short -1.99% Asian Bamboo AG, -0.70% SolarWorld Aktiengesellschaft, -0.63% Global PVQ SE

Tiger Management: Short -1.08% Powerland AG

Citadel Advisors:  Short -4.13% Aixtron, -1.82% SolarWorld Aktiengesellschaft, -1.60% Wacker Chemie AG

D.E. Shaw: Short - 0.97% Dragerwerk AG & Co, -.60% Leoni AG


As you can see, numerous funds are short Aixtron, a provider of deposition equipment to the semi-conductor sector.  Maverick's bet against the company is by far the largest we've seen thus far.  We'll continue to track short positions in the German market and will update when appropriate.

For more EU disclosures, head to yesterday's post on hedge fund short positions in the UK.

Hedge Fund Short Positions in the UK: Lone Pine, Greenlight, Kynikos & More

New EU rules that came into force at the beginning of November on short selling are leading to wider disclosure of shorts positions.  For example, the UK's Financial Services Authority (FSA) have implemented the EU's Short Selling Regulation and are now publishing a list of short positions on a daily basis.

New UK Short Selling Disclosure Rules

Before the implementation of the new Regulation funds and individuals only had to disclose short positions in UK financial companies and companies involved in a rights issues.  Now short positions have to be declared across all sectors.

The new rules require that where a fund's net short position reaches 0.2% of the issued share capital of a company they need to privately notify the FSA. Notification is also required again at each 0.1% increment after that. This is in relation to both increases and decreases of the position.   The obligation to privately report positions also extends to net short positions in sovereign debt and positions in uncovered sovereign credit default swaps (CDS).

ESMA has published a list of the different thresholds for each Member State in these instruments.   Public disclosure is required for net short positions of shares that reach 0.5% of the issued share capital of the company concerned and each 0.1% increment above that.  Additionally disclosure is required publically when the position subsequently falls below 0.5%.


Hedge Fund Short Positions in the UK Revealed

Today's list of short positions published by the FSA is provided below.  All of the following positions are disclosed as of November 1st, 2012 and represent the percentage of the company's shares the hedge fund is short:

Lone Pine Capital: Short -1.05% Home Retail Group

Greenlight Capital: Short -4.43% Daily Mail and General Trust

Kynikos Associates: Short -2.52% ASOS, -0.61% African Minerals

Maverick Capital: Short - 1.26% ITV plc, -4.45% Home Retail Group

Pennant Capital: Short -0.98% William Hill plc

Lansdowne Partners: Short -3.42% Weir Group, -3.27% APR Energy, -0.62% Tesco, -1.81% British Sky Broadcasting Group, -1.87% Petrofac, -2.28% Aggreko, -2.51% WM Morrison Supermarkets, -2.59% Provident Financial, -2.73% WH Smith, -1.09% Ophir Energy, -1.33% Tullow Oil, -1.71% Man Group, -0.85% Prudential plc,

Och-Ziff Management: Short -0.92% Lancashire Holdings, -1.20% International Consolidated Airlines Group, -0.82% Glencore International,

Elliott Management: Short -2.65% Stagecoach Grou, -1.65% First Grou, -0.71% Glencore International,-0.59% Reed Elsevier,

SAC Global Investors: Short -1.11% Electrocomponents

SAC Capital Advisors: Short -0.74% Ocado Group

Odey Asset Management: Short -1.43% Lonmin, -1.44% Dignity, -1.77% APR Energy, -0.84% Capital Shopping Centres Group, -0.59% Serco Group

Joho Capital: Short -4.03% CSR

Luxor Capital: Short -1.82% Blinkx, -1.32% WH Smith,

D.E. Shaw: Short -0.52% TUI Travel, -0.64% WPP

Marble Arch: Short -2.05% Dixons Retail, -1.79% Home Retail Group

Axial Capital: Short -0.55% TUI Travel


For all our other coverage of hedge fund short positions, click here.


This initial slew of disclosures is a bit overwhelming, but we'll continue to monitor the filings and post about notable changes and new short positions taken by prominent hedge funds on an individual basis.

You can track all other hedge fund activity in UK markets from what we've posted in the past via that link.

Eminence Capital Plays Vodafone / Verizon Pairs Trade: Q3 Letter Excerpt

Ricky Sandler's hedge fund firm Eminence Capital is having a great year, up 6.7% net in the third quarter and up 22.3% net for the year through September with AUM north of $3 billion.  Their third quarter letter to investors details a new trade they recently put on:

Long Vodafone / Short Verizon Pairs Trade

For those unfamiliar, a pairs trade is a bet made where an investor goes long one security and shorts another.  Some investors utilize this to make a market neutral bet, while others use it to bet on mean-reversion.

Some hedgies will undoubtedly be familiar with this specific pairs trade as various funds have had it on in the past.  The trade here is essentially an arbitrage on the valuation of an asset both companies share: stakes in Verizon Wireless ("VZW").  Vodafone (VOD) owns 45% of Verizon Wireless and Verizon (VZ) owns 55% of Verizon Wireless.

Eminence put on this pairs trade (long VOD, short VZ) in recent months and here's why according to Sandler:

"VOD trades at a significant discount to VZ for a number of reasons and thereby creates a unique opportunity where the same asset is being valued by two sets of investors very differently.

If we assign a fair value to VZW for each of VOD and VZ we are left with the following valuation anomaly: the rest of VOD (after subtracting VZW at fair value) has an $82B Enterprise Value which values its best of breed European and Emerging Market wireless service business at 7x adjusted EBIT (EBITDA minus Capex) and 4.5x after-tax economic earnings. Simultaneously, the rest of Verizon (after subtracting VZW at fair value) has an $80B Enterprise Value for a structurally declining fixed line telephone business in the US that generates zero EBIT and trades at an infinite multiple of economic earnings because it burns free cash flow.

We think the time is right for this trade to play out because we have come to the point where VZW will need to pay out a lot of free cash flow to each of its owners over the next few years. VOD will increasingly appear to generate more free cash flow than it had been as investors begin to see these dividends from VZW. Alternatively, VZ’s free cash flow will appear to decline as it pays out cash from its consolidated position in VZW to VOD. We expect investors to more fully reward VOD for its look through cash flow since it will be receiving this cash regularly from VZW while investors will also come to realize that VZ can’t even afford to pay its corporate dividend when only 55% of the VZW cash flow is counted. It is also possible that VZ realizes its stock is overvalued and tries to use its currency to buy in the VZW it doesn’t own which would be a material positive for our position."


Given that numerous other funds have been in this pairs trade in the past, it's interesting that Eminence feels now is the right time to play it.  With some analysts expecting another VZW special dividend for VOD by year-end, we'll have to see how this trade plays out.  Vodafone is now Eminence's fourth largest long.

For more from this hedge fund, be sure to also check out why Eminence is bullish on Google.  While they reduced their position size a bit recently, it's still their largest holding.

Steve Mandel's Lone Pine Capital Starts New Positions in SemGroup & Informatica

Steve Mandel's hedge fund firm Lone Pine Capital filed two separate 13G's with the SEC yesterday after market close disclosing new positions:

SemGroup (SEMG)

First, Lone Pine has disclosed a 5.2% ownership stake in SemGroup with 2,172,935 shares.  This is a brand new position for them as they did not own any shares at the end of the second quarter.  This disclosure was filed due to trading activity on October 24th.

Per Google Finance, SemGroup "provide gathering, transportation, storage, distribution, marketing, and other midstream services primarily to independent producers, refiners of petroleum products, and other market participants located in the Midwest and Rocky Mountain regions of the United States of America, Canada and the West Coast of the United Kingdom."


Informatica (INFA)

Second, Mandel's firm has revealed a 5.2% ownership stake in Informatica with 5,624,068 shares.  This is also a brand new position as they did not report ownership at the end of the second quarter.  This position was also revealed due to trading activity on October 26th.

Per Google Finance, Informatica is "an independent provider of enterprise data integration and data quality software and services. The Company's software solutions enable a variety of complex enterprise data integration initiatives through the technologies, which include enterprise data integration, data quality, master data management, business to business (B2B) data exchange, application information lifecycle management, complex event processing, ultra messaging, and cloud data integration."


Earlier today we revealed one of Lone Pine's short positions as well.  You can also check out other recent long activity from Lone Pine.

Eric Sprott's Latest Commentary: Weakness Begets More Weakness

Playing catch-up with various market participants this week, we now turn to Eric Sprott's latest commentary from Sprott Asset Management.  Entitled "Weakness Begets More Weakness," the latest Sprott missive asks, how does the US achieve a sustained recovery if the 99% continues to suffer perpetual decline in real income?

Their full commentary is posted below, but they conclude that:

"The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen  years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need  yield, and for all the trillions of dollars that the US government and other western governments have spent and printed,  none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach  year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they  directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets  weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we  do not see it reversing any time soon."

On the same topic, earlier this morning we also posted up David Einhorn's comments on low interest rate policies and how they're now doing more harm than good.

Embedded below is Eric Sprott's latest commentary:




For more from this manager, we've in the past posted up Sprott's commentary on gold.

Hugh Hendry On Gold, Treasuries, Japan, China & More: Buttonwood Gathering

It's been a long time since we last checked in on Hugh Hendry of Eclectica Asset Management so today we're highlighting his recent talk at The Economist's Buttonwood Gathering.  He touched on hot topics such as gold, treasuries, China, Japan, hyperinflation and a myriad of other things.

Key Takeaways

Hendry continues to like gold, but not the gold miners.  While he has been an advocate of the precious metal for many years, he continues to like it (albeit with slightly less conviction than previously).

We've highlighted one hedge fund's view that miners are better than gold and Hendry obviously disagrees with that.  And recently at the Great Investors' Best Ideas conference, David Einhorn made a quip that one should have gold miners in their portfolio.  Clearly, this is a divisive topic.

Hendry is also worried about creditor nations.


Notable Quotes From Hendry

Hendry said that, "My community of global macro managers always wants to short the JGBs and short the yen, and yet they've gone the opposite direction ... If you want to be short JGBs for the ultimate response, you don't survive the journey."

We've pointed out Kyle Bass' negative views on Japan and JGBs in the past.  Hendry points to real problems coming in Japan should some of their major companies near bankruptcy (he mentioned Sharp).

Hendry on Treasuries:  "Don't tell me China will sell their US treasuries.  If they sell their treasuries, the renminbi goes higher and higher and higher.  And their companies that export go bust."


Embedded below is the video of Hendry's entire talk at The Buttonwood Gathering:



We've previously highlighted some of what Hendry was buying earlier this year.  And for further hedge fund commentary from the Buttonwood Gathering, head to David Einhorn's talk.

David Einhorn On Negative Effects Of Low Interest Rates & QE: Buttonwood Gathering

Greenlight Capital's David Einhorn recently spoke at The Economist's Buttonwood Gathering and gave his thoughts on the Federal Reserve's policies and their effects.  Einhorn said that,

"The assumption is that if we want the economy to improve, if we want more jobs, if we want more consumption, what we need are ever easing monetary policy ... 1 jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have.  It gets to a point where it's not a question of a diminishing return, but it actually turns out to be a drag ... we're past the point where incremental easing of the Federal policy actually acts as a headwind for the economy and it's actually slowing down our recovery.

Einhorn drilled down the effect of low interest rates on consumers in particular, stating:  "Lower rates drive up the costs of commodities."  He says it doesn't help and it takes income out of people's pockets that they could normally spend otherwise.

Additionally, he says that not being able to earn a return on your savings means that people are now hoarding savings instead of spending because now those people feel they need more for retirement because they're not going to be able to earn as much from those savings.

In addition to Einhorn's talk, he's also expressed similar sentiment in a piece he wrote in the Huffington Post talking about the Fed's "Jelly Donut Policy."

Embedded below is David Einhorn's entire talk from The Buttonwood Gathering (fast forward to minute 56 for his portion):




For further hedge fund commentary from the same Buttonwood event, head to thoughts from Hugh Hendry.

Jeff Saut: Housing Is Improving & Is The Key Driver

Strategist Jeff Saut is out with his weekly commentary in which he touches on drivers of the American economy in the private sector and how improvement in housing will be the key driver going forward.

Saut notes that we may be seeing a transition in the private sector, a changing of the guard per se.  He feels that exports and manufacturing have waned while housing and residential construction has surged.  He points to home prices rising and a resurgence in housing as the key to employment numbers.

While he argues that manufacturing and exports will regain strength once the fiscal cliff issue is resolved, Saut thinks that "housing looks to be an undiminished theme over the long run."

He doesn't like the homebuilders quite yet, but his real estate analysts have recommended Rayonier (RYN) as a play on housing, noting:

"We reiterate our Strong Buy rating on Rayonier following 3Q results, as we believe RYN shares offer one of the  most compelling risk/reward profiles in our REIT coverage universe.  We view Rayonier as a special situation  within REITs, driven by compelling growth prospects for its performance fibers business and a growing dividend  (+33% since 2009), which also offers investors a unique way to play improving residential construction activity."


Embedded below is Jeff Saut's weekly market commentary:




You can download a .pdf copy here.

For more from Saut, check out his piece on how investing performance is determined by how you manage losses.

What We're Reading ~ 11/2/12

There's always something to do: The Peter Cundill Investment Approach [Christopher Risso-Gill]

David Einhorn & Greenlight Capital's Q3 Letter [Dealbreaker]

In-depth summary of Warren Buffett's recent appearance [BrooklynInvestor]

Profile of Buffett's new PM: Ted Weschler [Bloomberg]

The death of PC's? [Barrons]

Excerpt from Seth Klarman's recent letter [Business Insider]

Investors' 10 most common behavioral biases [Above the Market]

Notes from meeting with value investor Mohnish Pabrai [Perfect Research]

Blackstone targets stakes in hedge fund managers [Reuters]

Och-Ziff looks to exit the landlord business [Reuters]

Hedge fund Edoma Partners to shutter [Reuters]

Maverick Capital to launch concentrated fund [WSJ]

Thomas Steyer to step down from Farallon Capital [BusinessWeek]

Coatue preps private equity fund [HedgeFundIntelligence]

Activist investor Rosenstein sends ripples to make waves [WSJ]

How not to run a hedge fund [Forbes]

John Burbank's Passport Capital Boosts VIVUS Stake

John Burbank's hedge fund Passport Capital has filed a 13G with the SEC regarding shares of VIVUS  (VVUS).  Per the filing, Passport has disclosed a 8.5% ownership stake in VVUS with 8,552,929 shares.

This marks a 5% increase in the amount of shares owned since the end of the second quarter.  The disclosure was filed due to portfolio activity on October 23rd.

Burbank's Thesis

We've heard rumblings that Burbank pitched VVUS at the Excellence in Investing conference in San Francisco the week prior and he believes it is a takeout candidate for big pharma.  He's pointed to the company's obesity drug which he thinks will be very important.   VVUS is said to represent around a 5% position for his fund.

Per Google Finance, VIVUS is "a biopharmaceutical company. The Company is engaged in the development and commercialization of therapeutic drugs for underserved markets, including obesity and related morbidities, such as sleep apnea and diabetes, and men's sexual health."

In the past, we've also pointed out how Passport likes Saudi equities.

Dan Loeb's Third Point: October Exposure Report & Top Holdings

Dan Loeb's Third Point Offshore Fund is out with its latest exposure report for October and in it we see that they were up 2.6% for the month and are up 13.8% for the year.


Net Exposure Levels

Their equity exposure continues to rise as they are now net long 44.1%, an increase of 2.4% in net long exposure from the month prior.  This looks to mainly be attributed to a reduction in their short exposure. 

Their largest net long equity exposure continues to come from the technology sector (largely due to their Yahoo position) at 18.8% net long, followed by financials at 8.7% net long (mainly due to their AIG stake).

In credit, they were 26.7% net long at the end of October, down from 30.4% the month prior.


Top Winners & Losers

Their stake in Dolphin Capital Investors was a top winner during the month.  We were the first to reveal that Third Point was set to buy a stake in the Greek property & land company.

Other winners for Third Point include their new stake in Greek Government Bonds as well as Yahoo, AIG, and Murphy Oil.  Murphy recently announced it would spin off its US downstream subsidiary.

Their top losers in the month were Apple, gold, and Overseas Shipholding Group, a new name we've not seen listed in their reports previously.


Third Point's Top Positions

1. Yahoo! (YHOO)
2. American International Group (AIG)
3. Greek Government Bonds (GGB)
4. Gold
5. Murphy Oil (MUR)

You can read Loeb's thesis on AIG, GGB & Murphy in Third Point's Q3 letter.

Notes From Great Investors' Best Ideas Conference 2012: Einhorn, Bass, Cooperman, Carlson & More

The 6th annual Great Investors' Best Ideas Investment Symposium in Dallas, Texas just concluded and we've compiled notes from the event below.

The event was another great success raising money for The Michael J. Fox Foundation for Parkinson's Research and the Vickery Meadow Youth Development Foundation.


Notes From Great Investors' Best Ideas Conference

David Einhorn (Greenlight Capital): Short Iron Ore

Kyle Bass (Hayman Capital) on SuperMedia debt & Japan

Lee Cooperman's Macro Outlook & 3 Stock Ideas (Omega Advisors)

Clint Carlson's 2 Investment Pitches (Carlson Capital)

Boone Pickens on Natural Gas & His 2 Stock Picks (BP Capital)

Mick McGuire (Marcato Capital Management) on Cincinnati Bell, Corrections Corp & NCR

Susan Byrne's Investment Outlook: Case for Kapstone Paper & Media Nusantara

Rusty Rose (Cardinal Investment Company): Avoid Major Banks

David Einhorn: Short Iron Ore (Great Investors Best Ideas Conference)

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is David Einhorn of Greenlight Capital.  Einhorn made a presentation entitled 'If you give a miner a dollar..." and said to short dirt.  And by dirt, what he means is to short iron ore.

While Einhorn said that everyone "should have gold miners in their portfolio," it became clear he was less sanguine about other types of miners.


Iron Ore Supply/Demand

Einhorn started his presentation with the supply/demand dynamics of iron ore, noting that the infrastructure to get ore out of the ground is not cheap.  He pointed out that it's cheaper for China to import ore from Australia than to dig it out of their own ground.  Einhorn put up a chart showing iron ore prices from 1981-2011, peaking in the most recent year.

He went on to say that, if you give miners dollars, they dig holes.  Higher prices attracted new supply and new players.  It takes years to bring new supply online and he points out that there's a massive amount of supply about to hit the market.

He points out the Chinese investment binge as the driver of demand and notes that "something that's unsustainable persists... until it doesn't."

Einhorn then shifted to steel and noted that 2010 was the last year where steel saw double-digit demand growth.  Supply now exceeds demand and they're in the midst of expansion.  Big projects from 2010/2011 are coming online and the cost of stopping development is too high.
 
Einhorn argues that you can't contain the near-term situation since it's so expensive to halt projects.  He feels that ore prices will head below 100/ton and could get as low as 80/ton.  He even said that by 2014 it could go as low as the 60's.  He opined that the iron ore situation could soon reflect the same situations that took place in polysilicon and LEDs.


Losers Singled Out By Einhorn

While Einhorn did not explicitly come out and say he was short any of these names, he put up a list of companies that will lose in this scenario:

Iron Ore Miners (huge projects that will come online into declining markets): Vale (VALE), BHP Billiton (BHP), Rio Tinto (RIO), Fortescue (FMG), Cliffs (CLF)

Equipment Makers (already have seen growth into infrastructure build): Caterpillar (CAT), Joy Global (JOY)

Integrated Steel Companies: US Steel (X), Arcelor Mittal (MT).


Einhorn pointed out that X and MT have had an advantage because they own their ore supplies while their competition purchases ore in the markets.  However, he says this competitive advantage erodes as the price of ore falls.  The price of steel is also falling.  These integrated steel companies are also facing competition from irrational Chinese steel mills that are willing to operate at a loss.

Last week we also highlighted that Tiger Management's Julian Robertson said to avoid steel stocks as well.

Einhorn argues that the equities of the above companies reflect resumption of Chinese demand but that seems dubious.  He feels like companies are investing a lot at the top.  For more from this hedgie, also check out Einhorn's presentation on 3 ideas from the Value Investing Congress.


For the rest of the GIBI presentations, head to notes from the Great Investors' Best Ideas conference.

Kyle Bass on SuperMedia Debt & Japan

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Kyle Bass from Hayman Capital.

Bass mentioned that 90% of what he owns is in bonds (he has a ton of RMBS/subprime exposure).  He joked that he's constantly a contrarian since many other speakers at the event expressed disdain for bonds (though to be fair, the others were negative on treasuries, not RMBS).  He presented two ideas:


SuperMedia Debt

Before presenting his ideas, Bass noted that he pulled an 'audible' so this idea wasn't as in-depth.  Bass points out that bankruptcy wiped out billions for the company and that the debt trades at 66 cents while equity has fallen into obscurity.  He notes it's paying a 20% coupon and he thinks it's worth par in 2-3 years.  He also pointed out how SuperMedia is trying to merge with fellow competitor DexOne.


Bass: Don't Own Japan

Bass said that there's 80-200 trillion in global debt. In 18 months Japan will structurally fall apart.  "There's no chance at Japan repaying their debt."

He says psychology is important so look at anchoring bias.  It's important to think about how others think about debt.  Japan's debt to GDP is the worst in the world.  Their debt is 25x their revenues.  (David Einhorn was checking out Bass' slideshow).


Bass said there's 3 axioms that are actually false:

1. Positive current surplus, Japan not self-funding:  This is flat false he says.

2. Bank of Japan not monetizing the debt: Bass says they're already buying 2/3rds of the bonds today.

3. Retail investors will always support JGB's: Bass says Japan has a secular population decline.


We highlighted how in the past Bass has said that Japan would be selling more adult diapers than kids' ones and that's now the case.  He also pointed out how the country is having "adult diaper fashion shows."

He also illustrated how Japan is trying to sell JGB's by showing advertisements of a schoolgirl band selling them and sumo wrestlers pitching JGBs.

Touching on the Softbank/Sprint deal since it was mentioned earlier in the panel by Lee Cooperman, Bass noted that Softbank paying 20 billion yen to buy broken telecom is Softbank exporting yen as investors are starting to flee the currency.

Bass says that Japan has one of the "largest structural fiscal deficits in the world."  He doesn't know when exactly this collapse happens as this could go on for a few years?  He notes the timing on this sort of thing is very hard to peg, but it will "absolutely happen."

He wrapped up talking about playing options on this scenario because if it happens, you get paid a ton.  But in the mean time while you wait for it to happen, you only lose a little (we assume he's referring to price put options on Japanese JGBs, a trade he's talked about in the past).  For more on this manager, we've also recently posted up Bass on Europe and how he's investing.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Lee Cooperman's Macro View & Thesis on McMoran Exploration, Sprint Nextel & Tetragon Financial

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Lee Cooperman of Omega Advisors.  He talked about his overall macro view and then drilled down on three stock picks.


Cooperman's Macro Takeaways

He says he's been optimistic the last three years, but is indifferent about markets now.  He thinks we'll see slow growth and no recession (a 1 in 5 chance it happens).  He points to the ECB succeeding in kicking the can down the road and China avoiding a hard landing as keys going forward.

Cooperman argued that the Fed has created an environment that's best for equities.  Valuation is attractive when you compare it historically, though he later said that the valuation for the market now is "about right."  He says investors have de-risked and many managers are running low exposure.  Therefore, the max-pain trade is a move higher.

He believes that a peak in corporate profits in this business cycle is coming and that the fiscal cliff is a formidable issue for the market.  While the economy is not great, we need to see a bigger dent in unemployment.  We recently posted up another great presentation from Cooperman on hedge funds and life.

The Omega founder singled out high yield bonds as they yielded 20%+ in the crisis and now that yield is down to 6%.  There's been a dramatic re-pricing in high yield, but not so much in equities.  He again pointed out his disdain toward US government bonds, pointing out a contrarian signal that pensions have their third lowest equity exposure since 1997.

He thinks that investors will sell investments before the tax rates go up.  As far as the election goes, he's also pro-Romney.


Cooperman's 3 Stock Picks


1.  McMoran Exploration (MMR): He really loves the leadership of this company and thinks they're poised to do great things with their wells.  Currently trading at just over $11.75, he thinks the stock is worth $33 and points to Chevron and Freeport McMoran also being involved in their projects.


2.  Sprint Nextel (S):  He talked about how Softbank is putting $8 billion into the company and thinks the stub is worth $3.67 at 3x EBITDA.  He says the company is growing better than people give them credit for and many investors gloss over the name due to the poor Nextel deal.  Cooperman also pointed out past success by Softbank with telecom in Japan and Vodafone, noting vast improvement post-involvement of Softbank.  In 12-18 months, he thinks S is worth $6.50.


3.  Tetragon Financial (TFG):  He labeled this company as "too complicated" and blasted management at the beginning of his pitch, but then still managed to make the case for the company.  He said that you "go to bed with dogs, you wake up with fleas" and pointed out that the company hasn't had a conference call for 5 years so it's tough to get questions answered.

We're pretty sure he said his cost basis is around 2-3 in the name.  He pointed out the company's 20% return on equity, a book value of between 14-25 and the fact that a large portion of the company's market cap is in cash and it trades at a big discount to book.  It's also worthwhile that Cooperman has also held a longstanding position in similar company KKR Financial (KFN).


Perhaps the most telling statement from Cooperman was that he's sitting on a lot of cash now because there's a lot that can happen in the coming months.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Clint Carlson Says Avoid 10 Year Treasuries, Take a Chance With PostNL

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Clint Carlson of Carlson Capital.  He focuses on multi-strat in order to reduce volatility and said that "what you don't own is just as important as what you do."  Here are his two picks:


Carlson Says Avoid 10 Year Treasuries

His first play was to not own 10 year government bonds in any currency.  We've highlighted how Lee Cooperman strongly dislikes treasuries at this juncture and Carlson echoed those sentiments.  He said that many people are overlooking the fact that rates could jump higher.  While the Fed Funds rate will remain low, the 10 year doesn't necessarily follow that.  Carlson also does not believe we go the way of Japan.

He says that treasuries are not a good risk/reward and event co-founder Shad Rowe quoted Jim Grant, saying that these bonds offer return-free risk.  Carlson, however, said that you can't short treasuries now because the Fed can buy longer than you can remain solvent.  He dislikes corporate bonds as well and says to keep that exposure to a minimum for diversification.


Carlson's 2nd Pick: PostNL

His second idea was probably the most 'true hedgie' play at the conference.  What we mean by that is that it's a cheap option on risk arbitrage but also a fundamental investment.  His pick was PostNL (AMS:PNL or PNYLL via ADR).  The Dutch delivery company represents the "perfect storm" he says.

PostNL owns almost a 30% stake in TNT Express, which is set to be taken over by UPS (pending deal closure).  Carlson argues there's a range of outcomes which is why it's compelling.

Scenario 1: The deal does not close and downside is 20%.
Scenario 2: The deal does not close but significant upside remains if the market values PNL's TNT Express stake
Scenario 3: The deal closes, PNL gets 1.5bn and the stock doubles

Carlson thinks the deal closes, but points out this is a risky bet.

On the fundamental side of the investment, he points out how operating margins have tanked from 14% down to 7% and they're modeling an improvement up to 8-9%.  He points out how mail volumes in the Netherlands have dropped 10% per year and so that's a risk.  Carlson thinks that it's close to the trough, but that Europe doesn't improve for 4-5 years.

In order to compete, the company either has to raise prices otherwise they'll shut down.  He thinks it's also a potential leveraged buyout (LBO) candidate and that "this will be a volatile trade."  Right now there's a big percentage of owners that are event-driven or risk arbitrage funds.  If the deal falls through, there will be an ownership shift.

Carlson is focused on the end-game here and sees this as a 6 month - 1 year holding.  He says you could buy 1/2 a position now and buy another 1/2 to "double down" if the chance presents itself at lower levels.  We also took notice that Lee Cooperman (also on the panel) was taking notes on this pitch.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Boone Pickens Says Natural Gas Heading Higher, Likes National Oilwell Varco & Pioneer Natural Resources

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Boone Pickens of BP Capital Management.  The legendary energy man focused on, you guessed it, energy.

Pickens started his presentation talking about how the oil industry has changed over the past 10 years and how he thinks we can rebuild the economy off of cheap energy.  In politics, he thinks Romney will win the election and says he has the first true US energy plan (though it's not complete and he'd like to see more natural gas used).


Pickens on Natural Gas

One of the bolder calls of the conference was made when T. Boone argued that natural gas prices would rise to $4.50 or $5 in the next year and could see $6 by 2015.


Pickens' Stock Picks

At GIBI, Pickens recommended two stocks.  His first pick was National Oilwell Varco (NOV).  It currently trades at just under $74 and he thinks it will see $100.  He points to the company's huge shale opportunity for development and that there's still support for oil domestically and internationally.

His second pick was Pioneer Natural Resources (PXD), which he likes due to their great assets, pointing to 900,000 acres (of which he specifically mentioned the Permian basin assets).  He says they'll be drilling for a while.  The stock currently trades at just under $106 and he thinks it sees $150.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Mick McGuire on Cincinnati Bell, Corrections Corp & NCR Corp

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Mick McGuire of Marcato Capital Management.  He focuses on companies with market caps between $1-5 billion and employs activism where needed.  He previously worked for Bill Ackman's Pershing Square.  He pitched 3 ideas:


Long Cincinnati Bell (CBB)

Trading around an EV of 3.8bn, McGuire highlights that Cincinnati Bell is actually two companies in one: a legacy telecom company that generates cashflow but is declining and a data center/colocation business that is seeing 20% growth year over year.

Currently, CBB uses free cash flow to fund the data center growth.  The stock is disliked by both growth and yield investors so the solution is to split the businesses.

The company will be spinning off its data center business as a REIT.  Then the telco business can de-lever, pay a dividend and repurchase shares.  McGuire is looking for a December or Q1 initial public offering (IPO).  His sum of the parts yields a target price of $8.30.

We just posted yesterday how Marcato Capital Management filed a 13G on CBB and are now one of the largest owners.


Corrections Corp of America (CXW)

This is an oldie but goodie as McGuire's previous employer, Pershing Square, had also owned Corrections Corp in the past.  Marcato Capital Management says this is a name with a hard catalyst in the form of a REIT conversion.

McGuire has been working with Corvex Management on this one (Keith Meister's activist firm) and CXW is waiting on approval.

The fundamental thesis on this name is that there's an "acute overcrowding problem in public prisons."  McGuire argues that private prisons like CXW are a better option and there's significant barriers to entry here.  The average cost per bed is 80k+ for government versus 55-65k for private.  He also points to incremental margins being high.

Given the theme of REIT conversions this year in the markets, McGuire highlighted why it's beneficial to be a REIT: free cashflow by tax savings, superior credit rating, and cap rates.  He says CXW trading at 15x AFFO would be worth $50/share.


NCR Corp (NCR)

McGuire's last idea is National Cash Register (NCR).  They supply ATM's and point of sale (POS) devices.  They have an incumbent position in the market and ATM's are their primary focus.  He likes that they have high barriers to entry due to the frequent servicing requirements of ATMs (Diebold is their main US competitor).

He pointed out that emerging markets are driving growth and that there are often regional duopolies in the segment.  In North America, we're in the midst of a big upgrade cycle for money center banks but it's just begun for smaller banks.  The thought here is that banks pay up for advanced ATMs to reduce in-branch spending.

McGuire also points out that NCR is #2 in self-checkout point of sale, behind IBM.  This has been a big trend popping up around the country.

He points out that the growth is obscured by the company's underfunded pension.  The company issued $600mm in debt at 5% to help fund it.  Marcato Capital Management originally built their position in the spring.  He likes the 11% free cash flow yield and sees 35% upside.  He sees $3.80 in EPS in 2015.

For more from this hedgie, we've previously posted McGuire's 3 ideas from the Value Investing Congress.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Susan Byrne's Investment Outlook: Likes Kapstone Paper & Media Nusantara

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Susan Byrne of Westwood Holdings.  Westwood serves various institutional clients and manages $15 billion.


Byrne's Investment Outlook

She started by focusing on Westwood's outlook that in the next 1-3 years we'll see slow below potential GDP growth.  She disagrees with Lee Cooperman a little bit. She's more positive on corporate earnings and likes playing high quality names globally.

Byrne thinks we'll see rising but tame inflation and she likes to play companies that have yields higher than the S&P 500.  She said that the "ultimate risk instrument is stocks" so you need some insulation/protection in the form of a dividend.

She likes companies that grow dividends and put up a chart of the likes of Microsoft (MSFT), Exxon Mobil (XOM), Honeywell (HON), Johnson & Johnson (JNJ), General Electric (GE), and Automatic Data Processing (ADP).  She points out that all of these have equity yielding more than their bonds.

Byrne feels the S&P is "somewhat undervalued" by 10-12% and she wants to beat inflation with dividend yields.  She said to look at emerging markets, in particular Indonesia.


Byrne's Stock Picks

And speaking of Indonesia, she had a stock pick from that country via shares of Media Nusantara (PTMEY via ADR), an advertising company there.  She points out that they're growing advertising by 22% a year and you can play it in the domestic market or via ADR.  The company has a 2% dividend and a mid-teens multiple.


Byrne also pitched a domestic small-cap play via Kapstone Paper (KS).  It trades at 5x EV/EBITDA, has a 10% free cash flow yield and the company's price increases for their products are holding.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Rusty Rose Says Avoid Major Banks

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Rusty Rose of Cardinal Investment Company.

Rose: Avoid Major Banks

His presentation centered around avoiding major banks as investments.  He argued that they've gotten so big and have strayed from what true banks used to be that you no longer really know what you're investing in.

Rose rattled off a list of reasons why, including capital structure, subsidy (banks enjoy low regulated interest rates), and structural mismatch among others.  He feels that banks should compete without subsidy and that the deposit guarantee should be axed.

He wondered why analysts use book value for banks when they don't underestimate assets and they don't overestimate liabilities.  He also feels banks are still over-levered and taking too much risk (due to management incentives).

Rose also touched on how the regulatory/political environment for financials peaked in 2008.  He compared big bank stocks to Paris Hilton, saying both are famous for being famous.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Keith Meister's Corvex Management Goes Activist on ADT: Slideshow Presentation

Keith Meister's hedge fund Corvex Management has filed a 13D on ADT (ADT) and has disclosed a 5.02% ownership stake with 11,541,021 shares.  This filing is also made jointly with Soros Fund Management, who have disclosed a 0.25% stake in ADT with 575,000 shares.  The filing was made due to portfolio activity on October 24th.


Corvex's Activist Stake

Keith Meister founded Corvex after working under Carl Icahn for years, so it should come as no surprise that he employs a similar activist strategy.  In the 13D, Corvex notes that they've already had discussions with management about the company's business and strategies and intend to have further discussions.

It's also worth pointing out that the footnotes reveal that Corvex only owns 1,844,021 ADT common shares.  The rest of their stake is broken down in a series of options trades:

- Own call options representing 7,307,000 shares with strike price of $25 and an expiration of 09/30/2013

- Own calls representing 1,065,000 shares with $25 strike and expiration of 10/28/2013

- Own calls representing 750,000 shares with exercise of $42 and expiration of 1/19/2013

- Sold OTC "European-style put options referencing an aggregate of 8,372,000 shares at an exercise price of $25.00 per share, of which 7,307,000 expire on September 30, 2013 and 1,065,000 expire on October 28, 2013 or, in each case, the date on which the corresponding American-style call option described above is exercised."

- Sold open market American-style put options referencing an aggregate of 750,000 shares with an exercise of $36.00 and expiration of January 19, 2013.

Soros Fund Management has also entered into an agreement that allows Corvex to vote Soros' shares as they see fit.


ADT Spun-Out From Tyco

The first thing you need to know is that ADT, a home security business, recently became independently traded as part of the Tyco spin-off.

It appears as though Corvex did not receive any shares in the spin-off and instead purchased the when-issued shares from September 17th through 28th at various dates and also made open market purchases and option purchases post-spin throughout the month of October.


Corvex's Thesis & Presentation on ADT

Meister has laid out an entire presentation on how ADT can improve its business and create more shareholder value.  This presentation was originally given at the Excellence in Investing: San Francisco event on October 24th.

The entire presentation is embedded below, but in summary, he basically believes that ADT is a unique franchise asset and has a defensive & predictable business model with consistent cash flows.  He points to the company's unappreciated secular growth tailwinds and notes its mispricing post-spin (poor capital structure, no public comps, etc).

The crux of his thesis, though, centers around balance sheet optionality.  Meister feels that ADT should increase leverage and improve capital allocation.  He calls ADT a "equity shrink story waiting to happen."


Embedded below is Keith Meister & Corvex Management's presentation on ADT:




For more on this hedge fund, we've also detailed some of Corvex's other activism here.

Julian Robertson On Why Hedge Funds Are Underperforming

Tiger Management's Julian Robertson seems to be making his yearly media rounds.  Last week we highlighted his thoughts on what stocks he likes now.  Today we're posting up his interview with BloombergTV where he talks about why hedge funds are underperforming.


On Why Hedge Funds Have Had a Challenging 2012

The Tiger Management founder said that, “They are having a challenge because a lot of people in the hedge fund business have become so disenchanted with the economies of the world. Europe is a mess and we see the fiscal problems of the United States. Hedge funds -there are a lot of them that really are disaster funds now. In other words, they are really only going to be profitable in the event of a big disaster.”


On Hedge Funds That Are Underperforming

Robertson argues that, “I think right now they are really scared. They have made a mistake. They are now unhedged because they are so scared. They really will succeed only if we have rather disastrous period…We have to assume that a black swan event is very unlikely…They have gotten so bearish that some of them that that is what has happened. They will not get out of it without a black swan type event.

This is still the best place to run money. One reason the hedge funds are not doing as well as they used to is the competition is more hedge funds. And that the competition is so much better than any other form of competition.”

The latter comments he made are something he's expanded on previously where we highlighted Robertson on the hedge fund industry past & present.


Embedded below is the video of Robertson's interview with Bloomberg:



Be sure to also check out the other recent interview on what stocks Robertson likes now.

Odey Takes Stake in Fellow Hedge Fund Man Group

Here's something you don't necessarily see everyday: a hedge fund taking a stake in another hedge fund.  Crispin Odey's UK-based hedge fund firm Odey Asset Management has purchased 5.1% of the voting rights of peer Man Group (LON: EMG) in a disclosure on October 25th.

The breakdown of their position is 3.03% ordinary shares and 2.12% contract for difference (we've previously explained contract for difference here).  This move makes Odey the second largest institutional shareholder of Man Group.  It will be interesting to follow the situation to see if anything develops further.

Another recent example of hedge funds buying stakes in one another is David Einhorn's Greenlight Capital purchasing shares of Howard Marks' Oaktree Capital earlier this year.

Marcato Capital Management Reveals Cincinnati Bell (CBB) Stake

Mick McGuire's hedge fund firm Marcato Capital Management has filed a 13G with the SEC pertaining to shares of Cincinnati Bell (CBB).  Per the filing, they have revealed a brand new position in CBB representing 7.19% ownership in the company with 14,192,985 shares.

The 13G was required due to portfolio activity on October 25th that brought them above the 5% ownership threshold where it's necessary for them to publicly disclose their stake.

This makes Marcato one of the largest institutional shareholders of CBB, along with Lonestar Capital Management.  An analyst at Lonestar pitched CBB in the Value Investing Congress investment idea contest and was a finalist.

It's also worth pointing out that CBB was one Ted Weschler's holdings at his old hedge fund that is now closed.  Weschler of course has been a portfolio manager at Warren Buffett's Berkshire Hathaway for a while now.  However, Berkshire has not invested in CBB.

Per Google Finance, Cincinnati Bell "is a full-service provider of data and voice communications services over wireline and wireless networks, a full-service provider of data center colocation and related managed services, and a reseller of information technology (IT) and telephony equipment. The Company provides telecommunications service to businesses and consumers in the Greater Cincinnati and Dayton areas on its owned wireline and wireless networks. The Company also provides business customers with outsourced data center colocation operations and related managed services in data center facilities."

For more from this manager, be sure to check out his presentation at the Value Investing Congress on 3 ideas with hidden value.

Bridger Management Boosts Wright Medical Group Position

Roberto Mignone's hedge fund firm Bridger Management recently filed a 13G with the SEC regarding Wright Medical Group (WMGI).  Per the filing, they have disclosed a 5.1% ownership stake in WMGI with 2,000,000 shares.

This marks an increase of 40% in their position size since the end of the second quarter.  Do note that this filing is made due to portfolio activity on August 22nd, so the filing seems to be a bit delayed.

Bridger is known for its focus on health-related plays and this stake certainly fits that mold.

Per Google Finance, Wright Medical Group is "a global orthopaedic medical device company specializing in the design, manufacture and marketing of devices and biologic products for extremity, hip and knee repair and reconstruction. The Company is provider of surgical solutions for the foot and ankle market. It offers products in four primary market sectors: extremity reconstruction, biologics, knee reconstruction and hip reconstruction."

John Griffin's Blue Ridge Capital Discloses New Stake in Workday (WDAY)

John Griffin's hedge fund firm Blue Ridge Capital filed a 13G with the SEC regarding shares of Workday (WDAY).  Per the filing, Blue Ridge has revealed a 6.87% ownership stake in WDAY with 1,798,000 shares.

This is a brand new position for the hedge fund and the company just began trading on October 15th.  There's no way to know for sure if they participated in the IPO, but the reason that is important to point out is because shares spiked 70% from the IPO price so there's obviously a big difference in cost basis depending on where they purchased shares.

Due to portfolio activity on October 18th, Blue Ridge crossed the threshold that requires public disclosure of their stake.  Workday competes in the software as a service (SaaS) segment.

Per Google Finance, Workday is "a provider of enterprise cloud-based applications for human capital management (HCM), payroll, financial management, time tracking, procurement and employee expense management. It is focused on the consumer Internet experience and cloud delivery model. Its applications are designed for global enterprises to manage complex and dynamic operating environments."

We've also covered other recent portfolio activity from Blue Ridge as well.

Julian Robertson on What Stocks He Likes Now: Interview

Tiger Management founder Julian Robertson made his rare television appearance for the year on CNBC yesterday and talked about how now is a time to put money to work in the market.

He thinks the economy and overseas worries are having a big effect on investors.  So many investors are frightened about Asia and Europe that they've almost "lost their way" without realizing that many great companies are trading at great prices.

He feels that this market is good for hedge funds because their namesake allows them to hedge against uncertainty and these potential risks.  However, he worries that some managers have hedged too much and they won't benefit unless there's a big fallout in the world economy.


What Stocks Robertson Likes

Robertson cited Apple (AAPL) as great company trading at a great value, something he says rarely happens.  He said, "Apple is now probably somewhere around 14-15 times next year's earnings, it's very, very reasonable for the kind of growth you can get."

Facebook (FB) was another stock Robertson mentioned as he likes the social media exposure and admires Mark Zuckerberg.  However, he does not "really know enough about the stock" to own a position.  He cited "younger people" that he's in partnership with as having owned Facebook early on back when it was private.  We'd assume he's referring to Chase Coleman's Tiger Global.

Robertson says he's looking for great companies and he's invested in a European airway company: Ryanair (RYAAY) as they're the low-cost provider.  He also likes Rolls Royce (LON:RR or RYCEY on the pink sheets) because many people see it as a luxury automobile when in reality it is a great supplier to the aerospace and other industries.  Steve Mandel's Lone Pine Capital has been an owner of Rolls Royce.

In terms of financials, Robertson cited Capital One (COF) and Ocwen Financial (OCN).  The latter, he says,  is a mortgage servicing company that he thinks has a lot going for them.

Robertson argues that steel companies AK Steel (AKS), US Steel (X), etc are overvalued and we'd need to see the economy really takeoff to warrant those multiples.


Embedded below is the video of Julian Robertson's interview:



For more on this legendary investor, head to Julian Robertson's thoughts on the hedge fund industry past & present as well as his past extensive interview with Columbia Business School.

East Coast Asset Management on Investment Process: Q3 Letter

Christopher Begg is out with East Coast Asset Management's third quarter letter to investors.  Entitled "Inventing a Flying Machine," the letter discusses investment process, something we try to focus on in addition to tracking hedge funds.

On Investment Process

Market Folly is a big proponent of saying that "investing is a continual education" and so today we learn from Begg who writes that, "In order to produce superior compounded returns over time I believe one must not only have a differentiated view but more importantly a differentiated investment process."

East Coast uses checklists to 'invert' their thinking and how they see an investment.  While they will be drawn to something that has cheap valuation, they want to look at why it's priced cheaply.  This falls directly in line with what Charlie Munger likes to say: "invert, always invert."

East Coast looks for a margin of safety in each investment and try to drill down an investment to the critical data points that drive the company's underlying fundamentals.


3 Types of Investments They Focus On

East Coast categorizes their investments in three ways:

1. Compounders - These typically have the longest duration and highest return potential.

2. Transformations -  These benefit from tailwinds either due to secular dynamics or a business' competitive advantage.  They note that many investors often don't have the patience or investment timeframe for these to pay-off.  These could also be labeled 'time arbitrage' plays, a type of investment the likes of John Griffin at Blue Ridge Capital makes.  East Coast has more than two-thirds of their portfolio allocated to compounders and transformations.

3. Work-outs -  These are investments that trade at a discount for whatever reason and they look for this gap to close.  These types of names typically have catalysts and are often invested in by various hedge funds.  East Coast allocates less than a third of their portfolio to these ideas.


Where East Coast Looks For Ideas

Here's their list of places to start:

- Market sell-offs
- Post-bankruptcy reorganization
- Spin-offs
- Industry transformations
- Political and economic clouds

We'd also toss in that in addition to during proprietary research, it doesn't hurt to look at what other investors are doing as well.  Bruce Berkowitz of Fairholme Capital has recommended this as it's a great place to find ideas to do further due diligence on as well.  Tracking hedge funds is the main purpose of MarketFolly.

Lastly, East Coast emphasizes the importance of thorough research.  They recommend finding competitors of the company you're looking at and talking to people involved in each respective industry to gauge the dynamics and competitive landscape.


Embedded below is East Coast Asset Management's Q3 letter:




For more from this firm, we've also posted up East Coast on what defines a great business as well as their past letter on mispricings.

Larry Robbins Buys More Tenet Healthcare Shares

Larry Robbins' hedge fund Glenview Capital filed another Form 4 with the SEC revealing further purchases in Tenet Healthcare (THC).  We just posted up about how Glenview was buying THC shares last week.

The latest filing indicates that Glenview purchased an additional 200,000 shares of THC on October 19th at a weighted average price of $23.53.  This brings their total ownership to 13,839,339 shares.

To see why this hedge fund has been buying, check out why Glenview likes Tenet.

The company recently completed a 1:4 reverse stock split and confirmed they'd be buying up to $500 million in stock, issue $800 million in new debt, and use $400 million toward potential acquisitions.

It's worth noting that Glenview has also owned other hospital/healthcare plays, including HCA (HCA), Lifepoint (LPNT), and Health Management (HMA).

Per Google Finance, Tenet Healthcare is "an investor-owned health care services company whose subsidiaries and affiliates own and operate acute care hospitals, ambulatory surgery centers, diagnostic imaging centers and related health care facilities. Its core business is focused on providing acute care treatment, including inpatient care, intensive care, cardiac care, radiology services and emergency medical treatment, as well as outpatient services."

Seth Klarman on Leadership: Video Interview

Baupost Group's Seth Klarman gave an intriguing guest lecture at Harvard's Psychology of Leadership course back in 2006.  Given his rare appearances, we wanted to highlight his thoughts on this topic below:

On Leading An Investment Firm

His most relevant thoughts were perhaps where he talked about leading an investment firm.  He noted that he talks with the non-investment team every quarter to make sure they're kept afloat about the firm's investment strategy.

He does this in order to make sure everyone in his organization is on the same page.  Klarman wants a business culture where people are willing to spend extra time to keep an eye out for mistakes.

Klarman says a good leader isn't afraid to fail.  Klarman also recommends finding a good mentor.  The latter is evident all through the hedge fund industry as you often see analysts and portfolio managers learn from talented investors and then go off to start their own firms.

The Baupost man also noted that turnover is a hidden cost in running a business since it takes time and effort to train them.  In the past we've posted up a profile of Baupost Group for those interested.


Moral Values For Leaders

Klarman also touched on moral values for leaders, noting that you have to play by the 'news test.'  What he means by that is you should live in a way that you would not be embarassed if something appeared on the front page of the news.  Fellow hedge fund manager Lee Cooperman also touched on this in his recent presentation on hedge funds and life.


Mistakes He's Made As A Leader

As an investor, it's obvious that learning from mistakes is a must.  Given Klarman's ability to do so as an investor, it should come as no surprise that he's also learned from his mistakes as a leader.  He advocated not to tolerate a "difficult person" for very long, even if they are talented.  It's clear that Klarman places a lot of value/emphasis on the moral character of his firm.


Embedded below is the video of Klarman's interview on leadership:



Hat tip to Valueprax for flagging this video.

For more from this legendary investor, be sure to check out notes from Klarman's book Margin of Safety as well as Klarman's recommended reading list.

John Griffin's Blue Ridge Capital Boosts Owens Corning Position

John Griffin's hedge fund firm Blue Ridge Capital recently filed a 13G with the SEC regarding shares of Owens Corning (OC).  Per the filing, Blue Ridge has revealed a 5.63% ownership stake in OC with 6,670,000 shares.

This marks a 162% increase in the amount of shares they own as the firm has added over 4.1 million more shares since the end of the second quarter.  This disclosure was required due to portfolio activity on October 9th.

Blue Ridge has purchased a few industrial and economically-sensitive stakes as of late and we posted about how Blue Ridge bought shares of Colfax (an industrial manufacturing company) and also increased its stake in Martin Marietta Materials (a materials producer).

Per Google Finance, Owens Corning is "engaged in composite and building materials systems, delivering a range of products and services. The Company’s products range from glass fiber used to reinforce composite materials for transportation, electronics, marine, infrastructure, wind-energy and other markets to insulation and roofing for residential, commercial and industrial applications. The Company operates in two segments: Composites, which includes its reinforcements and downstream businesses, and Building Materials, which includes its insulation and roofing businesses."


For more from this hedge fund, be sure to check out Blue Ridge's recommended reading list.

Carl Icahn Files 13D on Motricity (MOTR)

Corporate activist Carl Icahn has filed a 13D with the SEC regarding shares of Motricity (MOTR).  Per the filing, Icahn now owns a 30.73% ownership stake in the company with 17,466,277 shares.

This marks a 158% increase in the amount of shares he owns since the end of Q2 as detailed on his previous 13F filing with the SEC.  The new 13D was filed per activity on October 11th.


Breakdown of Icahn's Position

The purpose of the transaction is disclosed in the filing quoted below:

"On October 11, 2012, certain of the Reporting Persons were issued an aggregate of 44,098,926 units (the "Units") by the Issuer by exercising subscription rights to purchase Units, which subscription rights were distributed by the Issuer, for no consideration, in a rights offering to all of the Issuer 's stockholders on July 23, 2012 (the "Rights Offering").

Each Unit consisted of 0.02599 shares of the Issuer’s 13% Redeemable Series J Non-Convertible Preferred Stock (the "Series J Preferred Stock") and 0.21987 warrants, each warrant entitling the holder to purchase one share of the Issuer 's common stock at an exercise price $0.65 per share. The exercise price per Unit was $0.65. Therefore, in the Rights Offering, such Reporting Persons paid an aggregate cash exercise price of $28,664,301.90 to the Issuer and received an aggregate of 1,146,131 shares of Series J Preferred Stock and warrants to purchase an aggregate of 9,696,030 shares of the Issuer’s common stock."


And Icahn's ownership stake is further broken down in an additional section of the filing that further explains the securities his investment entities own:


"In connection with the Rights Offering, the Reporting Persons were issued an aggregate of 1,146,131 shares of Series J Preferred Stock.  See item 4 above.  The Series J Preferred Stock is not convertible into Shares or any other series or class of capital stock of the Issuer.  The shares of Series J Preferred Stock generally do not vote with the Shares but have limited rights to vote as a separate class on any amendment to its terms and to certain transactions in which the shares of Series J Preferred Stock would receive or be exchanged for consideration other than cash or similar securities.  The Series J Preferred Stock also has the right to 40 votes per share and vote together as a single class with the Shares on the certain measures to protect the Issuer’s net operating losses and a change of the Issuer’s name, in each case, brought before the Issuer’s stockholders for a vote by April 9, 2013.

On a quarterly basis, the Issuer’s board of directors may at its sole discretion, cause a dividend with respect to the Series J Preferred Stock to be paid in cash to the holders (i) until October 11, 2017 in an amount equal to 3.25% of the liquidation preference, as in effect at such time (initially $25 per share) and (ii) thereafter in an amount equal to 3.5% of the liquidation preference, as in effect at such time. If the dividend is not paid in cash, the liquidation preference will be adjusted and increased quarterly by the amount of such dividend.  The Issuer may, at its option, at any time, redeem the shares of Series J Preferred Stock at a redemption price equal to 100% of the liquidation preference per share in effect at such time (initially $25 per share). The Series J Preferred Stock is also redeemable at the option of the holders, if the Issuer undergoes a Change in Control (as defined in the certificate of designations governing the Series J Preferred Stock)."


About Motricity

Per Google Finance, Motricity is "a provider of mobile data solutions and services that enable wireless carriers to deliver mobile data services to their subscribers. It provides a suite of hosted, managed service offerings, including mobile Web portal, storefront, messaging, and billing support and settlement, which enable wireless carriers to deliver customized, carrier-branded mobile data services to their wireless subscribers."

Carl Icahn was one of the top 25 highest earning hedge fund managers of 2011.

Third Point To Buy Stake In Greek Property & Land Company

Daniel Loeb’s hedge fund Third Point has entered into a deal to buy up to euro 45m worth of new shares in AIM listed property company, Dolphin Capital Investors (LON: DCI) . 


A Play on Greece

Dolphin Capital Investors are a large private owner of developable seafront land in Greece and Cyprus. Dolphin also holds a 50% stake in Aristo Developers, the largest holiday-home developer in Cyprus. 

This isn't Third Point's first foray into the mess that is Greece.  Loeb is long Greek government bonds, a position revealed in their Q3 letter.


Special Rights Issue

Via a special rights issue, Dolphin Capital Investors are offering Third Point the chance to buy between euro 30-45m shares at GBP 0.195 per share. At the close on October 18th, DCI’s shares were worth GBP 0.265 so Third Point has the chance to buy their shares at a discount.

When the offering announcement was made on October 3rd, DCI’s shares traded at GBP 0.229 but Dolphin’s shares did trade at around the offer price back in mid-September. It appears that the recent rally in Dolphin’s shares has been brought about primarily by Third Point’s involvement. 

If the rights issue is successful, Third Point will hold between 19-28.5% of DCI’s outstanding shares. If Third Point keep more than 15% of DCI’s outstanding shares they will be able to appoint a non-executive director. 

Only shareholders on the register as of October 10th are eligible to participate in the offering which is expected to take place on October 25th. The minimum investment will be £100,000. Members of the public are not eligible to participate. 

Before the offering could take place, existing shareholders had to agree the special Third Point rights issue at an Emergency General Meeting (EGM) that was held today (October 22nd). DCI’s admission document states that they may not issue shares at less than net asset value. As the shares were trading at a massive 78% discount to NAV, shareholders had to grant permission.  This permission was granted as the resolution "was duly passed" today.

The largest shareholders are BlackRock with 16.42%, Dolphin Capital (the manager) with 15.16% and Fortress Investment Group with 12.16%. 


About Dolphin Capital Investors

Taken from Dolphin Capital Investor’s website – Dolphin is a leading global investor in the residential resort sector in emerging markets and one of the largest real estate investment companies quoted on AIM in terms of net assets. Dolphin seeks to generate strong capital growth for its shareholders by acquiring large seafront sites of striking natural beauty in the eastern Mediterranean, Caribbean and Latin America and developing sophisticated leisure- integrated residential resorts.

Since its inception in 2005, Dolphin has raised €898 million of equity, has become one of the largest private seafront landowners in Greece and Cyprus and has partnered with some of the world's most recognised architects, golf course designers and hotel operators. 

Dolphin's portfolio is currently spread over approximately 63 million m2 of prime coastal developable land and comprises 14 large-scale, leisure-integrated residential resorts under development in Greece, Cyprus, Croatia, Turkey, the Dominican Republic and Panama and a 49.8% strategic participation in Aristo Developers Ltd, which is one of the largest holiday home developers in south east Europe with more than 60 smaller holiday home projects in Cyprus. Dolphin is managed by Dolphin Capital Partners, an independent real estate private equity firm.


For more on this hedge fund's activity, we've posted up Third Point's Q3 letter.